The D.C. Council approved the city’s largest income tax cut in 15 years Wednesday, reflecting a growing urgency among lawmakers to help those who are struggling as low-rent apartments give way to million-dollar condos in the increasingly prosperous District.
The cuts lessen the tax burden for low- and middle-income residents beginning in January. Over the following four years, tax relief would reach every business, residents earning up to $1 million annually, and even those who inherit multimillion-dollar estates. The cuts would be funded mostly by slowing spending on a master plan for citywide streetcar service.
The council’s surprise decision circumvented Mayor Vincent C. Gray (D) and dealt a major blow to the lame-duck mayor. After the council slashed funding for his proposed new hospital east of the Anacostia River, the tax plan threatened to undo the streetcar system, another top Gray priority.
Council Chairman Phil Mendelson (D) said tax relief was more pressing. “We’re taking the city’s affordability issue head-on,” he said. The chairman orchestrated the resurrection of the tax-cut plan after Gray thought it was mostly dead. Mendelson used private phone calls and visits with council members over the Memorial Day weekend to revive it.
The plan emerged from a commission led by former mayor Anthony A. Williams, which had worked on it for about 18 months. The group’s goal was to make the tax code in the District, which is benefiting from a period of rapid economic growth, more progressive and competitive with neighboring Maryland and Virginia.
After the plan’s December release, it appeared to be stalled. Gray backed only a handful of the proposals, and most of those would have generated new tax revenue. He rejected the cuts, saying the loss of money would inhibit the city’s ability to close its widening economic disparity.
Mendelson did not support two tax increases that Williams had recommended to offset the bulk of the income-tax relief. He rejected a quarter-cent bump in the city’s sales tax and a $100-per-employee charge to businesses that was designed to capture revenue from those who work in the city but live elsewhere.
To make the city’s tax code more progressive, the council’s plan covers about $67 million of the almost $225 million in cuts with new revenue, mostly sales taxes on services. The city’s 5.75-percent sales tax will for the first time apply to health-club memberships, bottled water delivery, carpet cleaning, car washes, billiards, bowling and storage locker rentals.
The council approved the tax plan as part of an 11 to 2 vote in favor of an overall $10.6-billion spending plan for the budget year that begins in October. The budget also gives city employees raises, increases funding for almost every department and adds millions for new efforts to curb the city’s homeless crisis. A final vote authorizing the tax cuts will be held in June.
Council member Tommy Wells (D-Ward 6) voted against the budget, saying the cuts to the streetcar program were “too serious” and could prevent the District from creating a public transit system of its own, controlling prices and making sure poor residents can continue to navigate the city affordably.
“We need this,” Wells said, “so that those on limited income can continue to participate in our city as we grow it out.”
Council member Marion Barry (D-Ward 8) also voted against the budget, at one point calling Mendelson a “tyrant” for arranging the last-minute vote on the tax package and for limiting debate. Council members received the details after 9 p.m. Tuesday.
Mendelson dismissed the criticism, saying the recommendations of the tax commission had been public since December.
Gray spokesman Pedro Ribeiro said in a statement, “The mayor is deeply disappointed by today’s Council action which kills the streetcar system as we know it. Today’s decision cannot be undone in the coming years, as some Council Members have suggested, because the money will have already been spent on tax cuts for the wealthy.”
Mendelson and even some longtime Gray supporters said the mayor’s lame-duck status was a factor in Wednesday’s vote.
“If he was going to be around for another term, then that would factor into members’ thinking. That does not necessarily mean a new hospital would have a majority of the votes,” Mendelson said. “Was it a factor? Yeah. Did it make a difference? Don’t know.”
Council member Yvette M. Alexander (D-Ward 7), a friend and longtime ally of the mayor, was more blunt. Gray’s budget priorities, she said, “came out how it is to be expected for someone whose time is up after this year. . . . We had to look beyond this calendar year.”
Council member Muriel Bowser (D-Ward 4), the Democratic nominee for mayor who defeated Gray in the January primary, supported the budget and tax plan, saying it was a policy that “will help us grow the middle class.”
Council member David A. Catania (At Large), who is running for mayor as an independent, also embraced the plan. He did so while criticizing the tax on gym memberships, saying taxes should be added to activities the government wishes to discourage.
The council’s plan would add two new income-tax brackets. One lowers taxes — to 6.5 percent — for those earning $40,000 to $60,000 a year.
The plan also raises to $1 million the top income required for the highest tax bracket. It is now $350,000. A new, lower bracket would be created for those earning between $350,000 and $1 million.
In addition, nearly everyone between the two new tax brackets would benefit from an increase in the standard deduction to $5,200 for singles and $8,350 for married residents, the same as federal levels. Low-income residents would also see an expansion of the earned income tax credit.
Between 2015 and 2019, Mendelson’s plan would also reduce the city’s business franchise tax to 8.25 percent, the same rate as Maryland’s and closer to Virginia’s 6 percent.
Under the plan, the District would raise its $1 million threshold at which higher estate taxes apply to $5.25 million, conforming with the federal level.
The District would also try to become more attractive to investment bankers and others in the financial sector by exempting passive investment vehicles from its unincorporated business franchise tax.
Council budget officials estimated that the package would reduce the effective tax rate for all District resident taxpayers from 4.9 percent to 4.5 percent.
Mike DeBonis contributed to this report.